<Page>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
Commission file number 001-15925
COMMUNITY HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3893191
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
155 Franklin Road, Suite 400
Brentwood, Tennessee
(Address of principal executive offices)
37027
(Zip Code)
615-373-9600
(Registrant's telephone number)
------------------
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes /X/ No / /
As of August 13, 2001, there were outstanding 86,354,287
shares of the Registrant's Common Stock, $.01 par value.
<Page>
COMMUNITY HEALTH SYSTEMS, INC.
Form 10-Q
For the Quarter Ended June 30, 2001
<Table>
<Caption>
Page
PART I.Financial Information
ITEM 1. Financial Statements:
Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 2
Consolidated Statements of Operations - Three and Six Months Ended
June 30, 2001 and June 30, 2000 3
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and
June 30, 2000 4
Notes to Condensed Consolidated Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial Condition And Results of
Operations 7
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II Other Information
ITEM 1. Legal Proceedings 15
ITEM 2. Changes in Securities and Use of Proceeds 15
ITEM 3. Defaults Upon Senior Securities 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 5. Other information 16
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
INDEX TO EXHIBITS 18
</Table>
<Page>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 35,740 $ 13,740
Patients accounts receivable, net 316,499 309,826
Supplies 41,860 39,679
Prepaid expenses and income taxes 14,169 19,989
Current deferred income taxes 2,233 2,233
Other current assets 15,330 23,110
----------- -----------
Total current assets 425,831 408,577
----------- -----------
PROPERTY AND EQUIPMENT 936,336 850,201
Less: accumulated depreciation and amortization (169,627) (142,120)
----------- -----------
Property and equipment, net 766,709 708,081
----------- -----------
GOODWILL, NET 991,557 985,568
----------- -----------
OTHER ASSETS, NET 95,989 111,611
----------- -----------
TOTAL ASSETS $ 2,280,086 $ 2,213,837
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 21,499 $ 17,433
Accounts payable 86,460 83,191
Current income taxes payable 16,998 --
Accrued interest 20,278 27,389
Accrued liabilities 111,488 112,860
----------- -----------
Total current liabilities 256,723 240,873
----------- -----------
LONG-TERM DEBT 1,229,507 1,201,590
----------- -----------
OTHER LONG-TERM LIABILITIES 14,015 15,200
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value per share, 100,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value per share, 300,000,000 shares authorized; 87,296,185
shares issued and 86,320,636 shares outstanding at June 30, 2001; and
87,105,562 shares issued and 86,137,582 shares outstanding at December 31, 2000 873 871
Additional paid-in capital 1,001,204 998,092
Accumulated deficit (215,284) (235,783)
Treasury stock, at cost, 975,549 shares at June 30, 2001 and 967,980 shares at
December 31, 2000 (6,678) (6,587)
Notes receivable for common stock (211) (334)
Unearned stock compensation (63) (85)
----------- -----------
Total stockholders' equity 779,841 756,174
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,280,086 $ 2,213,837
=========== ===========
</Table>
See accompanying notes.
2
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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
NET OPERATING REVENUES $ 400,909 $ 317,136 $ 799,554 $ 625,787
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Salaries and benefits 156,047 123,815 309,781 244,222
Provision for bad debts 36,986 28,639 73,959 56,594
Supplies 46,129 36,431 92,888 72,410
Other operating expenses 78,071 61,038 152,161 118,168
Rent 9,846 7,438 19,687 14,537
Depreciation and amortization 21,633 17,530 43,094 33,910
Amortization of goodwill 7,028 6,210 14,074 12,378
----------- ----------- ----------- -----------
Total operating costs and expenses 355,740 281,101 705,644 552,219
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 45,169 36,035 93,910 73,568
INTEREST EXPENSE, NET 25,621 32,622 53,174 65,305
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 19,548 3,413 40,736 8,263
PROVISION FOR INCOME TAXES 9,897 3,235 20,237 7,164
----------- ----------- ----------- -----------
NET INCOME $ 9,651 $ 178 $ 20,499 $ 1,099
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE:
Basic $ 0.11 $ 0.00 $ 0.24 $ 0.02
=========== =========== =========== ===========
Diluted $ 0.11 $ 0.00 $ 0.23 $ 0.02
=========== =========== =========== ===========
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 85,713,343 58,175,050 85,696,119 56,423,677
=========== =========== =========== ===========
Diluted 87,517,797 59,310,601 87,554,317 57,554,519
=========== =========== =========== ===========
</Table>
See accompanying notes.
3
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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
------------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 20,499 $ 1,099
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 57,168 46,288
Stock compensation expense 22 43
Other non-cash expenses (income), net 474 (498)
Changes in operating assets and liabilities, net of effects of
acquistions and divestitures:
Patient accounts receivable 6,277 (9,321)
Supplies, prepaid expenses and other current assets 6,275 (3,989)
Accounts payable, accrued liabilities and income taxes 2,677 (30,486)
Compliance settlement payment -- (30,900)
Other 2,136 (6,635)
--------- ---------
Net cash provided by (used in) operating activities 95,528 (34,399)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquistions of facilities, pursuant to purchase agreements (50,063) (40,639)
Purchases of property and equipment (39,056) (24,006)
Proceeds from sale of equipment 53 62
Increase in other assets (15,398) (9,678)
--------- ---------
Net cash used in investing activities (104,464) (74,261)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of expenses -- 225,225
Proceeds from exercise of stock options 2,289 --
Common stock purchased for treasury (91) --
Borrowings under credit agreement 69,000 137,731
Repayments of long-term indebtedness (40,262) (252,588)
--------- ---------
Net cash provided by financing activities 30,936 110,368
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 22,000 1,708
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,740 4,282
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 35,740 $ 5,990
========= =========
</Table>
See accompanying notes.
4
<Page>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Community Health
Systems, Inc. and its subsidiaries (the "Company") as of and for the three and
six month periods ended June 30, 2001 and June 30, 2000, have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). In the opinion of management, such information contains all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results for such periods. All intercompany transactions
and balances have been eliminated. The results of operations for the six months
ended June 30, 2001 are not necessarily indicative of the results to be expected
for the full fiscal year ending December 31, 2001.
Certain information and disclosures normally included in the notes to
consolidated financial statements have been condensed or omitted as permitted by
the rules and regulations of the Securities and Exchange Commission, although
the Company believes the disclosure is adequate to make the information
presented not misleading. The accompanying unaudited financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto for the year ended December 31, 2000 contained in the Company's Annual
Report on Form 10-K.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management of the Company to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements. Actual results could
differ from the estimates.
3. ACQUISTIONS
Effective June 1, 2001, the Company acquired, through a purchase transaction,
the assets and working capital of a hospital for consideration of approximately
$60.7 million, including liabilities assumed. Licensed beds at the facility
totaled 168. The Company borrowed $49.0 million against its acquisition loan
revolving facility to fund this transaction.
4. RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Other Intangible Assets" (the "Statements").
These Statements make significant changes to the accounting for business
combinations, goodwill and intangible assets.
SFAS No. 141 eliminates the pooling-of-interests method of accounting for
business combinations. In addition, it further clarifies the criteria for
recognition of intangible assets separately from goodwill. This statement's
provisions apply to business combinations accounted for using the purchase
method for which the date of acquisition is July 1, 2001, or later.
SFAS No. 142 discontinues the practice of amortizing goodwill and indefinite
life intangible assets. Its nonamortization provisions are effective January 1,
2002 for goodwill existing at June 30, 2001, and are effective immediately for
business combinations with acquisition dates after June 30, 2001. Intangible
assets with a determinable useful life will continue to be amortized over that
period. SFAS No. 142 requires the Company to complete a transitional goodwill
impairment test during the initial interim period of calendar 2002. Any
impairment loss will be recorded as soon as possible, but in no case later than
December 31, 2002. In addition, SFAS No. 142 requires that intangible assets and
goodwill be tested at least annually for impairment of carrying value;
intangible assets would be tested for impairment more frequently if certain
indicators are encountered.
5
<Page>
We expect to adopt SFAS No. 142 effective January 1, 2002. Early adoption and
retroactive application of SFAS No. 141 and SFAS No. 142 are not permitted.
The Company expects that the adoption of these statements will not have a
significant effect on its financial position, but will have a favorable
effect on its results of operations.
5. ACCOUNTING PRONOUNCEMENT ADOPTED
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
is effective for all fiscal years beginning after June 15, 2000. SFAS No.
133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The Company adopted SFAS No. 133 on January 1,
2001. The adoption of SFAS No. 133 did not impact the financial position,
results of operations, or cash flows of the Company.
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except share and per share data):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
NUMERATOR:
Net income $ 9,651 $ 178 $ 20,499 $ 1,099
=========== =========== =========== ===========
DENOMINATOR:
Weighted-average number of shares
outstanding--basic 85,713,343 58,175,050 85,696,119 56,423,677
Effect of dilutive options 1,804,454 1,135,551 1,858,198 1,130,842
----------- ----------- ----------- -----------
Weighted-average number of shares
outstanding--diluted 87,517,797 59,310,601 87,554,317 57,554,519
=========== =========== =========== ===========
Basic earnings per share $ 0.11 $ 0.00 $ 0.24 $ 0.02
=========== =========== =========== ===========
Diluted earnings per share $ 0.11 $ 0.00 $ 0.23 $ 0.02
=========== =========== =========== ===========
</Table>
7. SUBSEQUENT EVENTS
Effective July 19, 2001, the Company amended its 1999 Amended and Restated
Credit Agreement. The Credit Agreement is syndicated with a group of lenders led
by The Chase Manhatten Bank and co-agents, Bank of America, N.A. and The Bank of
Nova Scotia. This amendment, among other things, extends the maturity of
approximately 80% of the $200 million revolving credit facility and the $263.2
million in acquisition loan commitments from December 31, 2002 to January 2,
2004.
On July 13, 2001, the Company signed a definitive agreement to acquire Southern
Chester County Medical Center, a 59-bed hospital located in West Grove,
Pennsylvania. Southern Chester County Medical Center is the sole provider of
general acute hospital services in its community. On August 2, 2001 the Company
signed a definitive agreement to acquire 369-bed Easton Hospital, the only
hospital in the city of Easton and Northampton County, Pennsylvania. These
transactions are subject to state regulatory approvals and licensing and are
expected to be completed and closed during the fourth quarter of 2001.
6
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements included herein.
SOURCES OF OPERATING REVENUE
Net operating revenues include amounts estimated by management to be
reimbursable by Medicare and Medicaid under prospective payment systems and
provisions of cost-reimbursement and other payment methods. Approximately 45% of
net operating revenues for the three month period ended June 30, 2001 and 46% of
net operating revenues for the three month period ended June 30, 2000 are
related to services rendered to patients covered by the Medicare and Medicaid
programs. In addition, we are reimbursed under other programs by
non-governmental payors using a variety of payment methodologies. Amounts we
receive for treatment of patients covered by these programs are generally less
than the standard billing rates. We account for the differences between the
estimated program reimbursement rates and the standard billing rates as
contractual adjustments, which we deduct from gross revenues to arrive at net
operating revenues. Final settlements under some of these programs are subject
to adjustment based on administrative review and audit by third parties. We
record adjustments to the estimated billings in the periods that such
adjustments become known. We account for adjustments to previous program
reimbursement estimates as contractual adjustments and report them in future
periods as final settlements are determined. Adjustments related to final
settlements or appeals that affected revenue were insignificant in each of the
three and six month periods ended June 30, 2001 and 2000. Net amounts due to
third-party payors as of June 30, 2001 were $14.6 million and as of December 31,
2000 were $2.3 million. We included these amounts in accrued liabilities in the
accompanying balance sheets. Substantially all Medicare and Medicaid cost
reports are final settled through 1997.
We expect the percentage of our net revenues received from the Medicare program
to increase due to the general aging of the population and the restoration of
some payments under the Balanced Budget Refinement Act of 1999 and Benefit and
Improvement Protection Act of 2000. The payment rates under the Medicare program
for inpatients are based on a prospective payment system, based upon the
diagnosis of a patient. While these rates are indexed annually for inflation,
the increases have historically been less than actual inflation. Reductions in
the rate of increase in Medicare reimbursement may have an adverse impact on our
net operating revenue growth.
The implementation of Medicare's new prospective payment system for outpatient
hospital care, effective August 1, 2000, had a favorable, but not material
impact to our overall operating results.
In December 2000, the Benefit Improvement and Protection Act of 2000 became law.
It is estimated that the changes to be implemented to many facets of the
Medicare reimbursement system will increase reimbursement. We do not believe
these increases will be material to our overall operating results.
In addition, Medicaid programs, insurance companies, and employers are actively
negotiating the amounts paid to hospitals. The trend toward increased enrollment
in managed care may adversely affect our net operating revenue growth.
RESULTS OF OPERATIONS
Our hospitals offer a variety of services involving a broad range of inpatient
and outpatient medical and surgical services. These include orthopedics,
cardiology, OB/GYN, occupational medicine, rehabilitation treatment, home
health, and skilled nursing. The strongest demand for hospital services
generally occurs during January through April and the weakest demand for these
services occurs during the summer months. Accordingly, eliminating the effect of
new acquisitions, our net operating revenues and earnings are generally highest
during the first quarter and lowest during the third quarter.
7
<Page>
The following tables summarize, for the periods indicated, selected operating
data.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
------- ------- ------- -------
(EXPRESSED AS A PERCENTAGE OF NET OPERATING REVENUES)
Net operating revenues 100.0 100.0 100.0 100.0
Operating expenses (a) 81.6 81.2 81.1 80.8
------- ------- ------- -------
EBITDA (b) 18.4 18.8 18.9 19.2
Depreciation and amortization 5.4 5.5 5.4 5.4
Amortization of goodwill 1.8 2.0 1.8 2.0
------- ------- ------- -------
Income from operations 11.3 11.4 11.7 11.8
Interest, net 6.4 10.3 6.7 10.4
------- ------- ------- -------
Income before income taxes 4.9 1.1 5.1 1.3
Provision for income taxes 2.5 1.0 2.5 1.1
------- ------- ------- -------
Net income 2.4 0.1 2.6 0.2
======= ======= ======= =======
</Table>
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2001 JUNE 30, 2001
------------- -------------
(EXPRESSED IN PERCENTAGES)
PERCENTAGE CHANGE FROM SAME PERIOD PRIOR YEAR:
Net operating revenues 26.4 27.8
Admissions 18.1 20.9
Adjusted admissions (c) 15.3 18.7
Average length of stay -- (2.6)
EBITDA 23.5 26.0
SAME-HOSPITALS PERCENTAGE CHANGE FROM SAME PERIOD PRIOR YEAR (d):
Net operating revenues 11.6 11.1
Admissions 5.2 6.0
Adjusted admissions 3.1 4.3
EBITDA 14.4 14.4
</Table>
- ----------
(a) Operating expenses include salaries and benefits, provision for bad debts,
supplies, rent, and other operating expenses.
(b) EBITDA consists of income before interest, income taxes, depreciation and
amortization, and amortization of goodwill. EBITDA should not be considered a
measure of financial performance under generally accepted accounting principles.
Items excluded from EBITDA are significant components in understanding and
assessing financial performance. EBITDA is a key measure used by management to
evaluate our operations and provide useful information to investors. EBITDA
should not be considered in isolation or as an alternative to net income, cash
flows generated by operations, investing or financing activities, or other
financial statement data presented in the consolidated financial statements as
indicators of financial performance or liquidity. Because EBITDA is not a
measurement determined in accordance with generally accepted accounting
principles and is thus susceptible to varying calculations, EBITDA as presented
may not be comparable to other similarly titled measures of other companies.
(c) Adjusted admissions is a general measure of combined inpatient and
outpatient volume. We computed adjusted admissions by multiplying admissions by
gross patient revenues and then dividing that number by gross inpatient
revenues.
(d) Includes acquired hospitals to the extent we operated them during comparable
periods in both years. The six months ended June 30, 2000 includes one more
business day in the period due to leap year.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Net operating revenues increased by 26.4% to $400.9 million for the three months
ended June 30, 2001 from $317.1 million for the three months ended June 30,
2000. Of the $83.8 million increase in net operating revenues, the five
hospitals we acquired after April 1, 2000 contributed approximately $47.3
million, and hospitals we owned throughout both periods contributed $36.5
million, an increase of 11.6%.
8
<Page>
The increase from hospitals owned throughout both periods was attributable
primarily to volume increases, rate increases from managed care and other payors
and an increase in government reimbursement.
Inpatient admissions increased by 18.1%. Adjusted admissions increased by 15.3%.
Adjusted admissions is a general measure of combined inpatient and outpatient
volume. We computed adjusted admissions by multiplying admissions by gross
patient revenues and then dividing that number by gross inpatient revenues.
Average length of stay remained unchanged. On a same-hospital basis, inpatient
admissions increased by 5.2% and adjusted admissions increased by 3.1%. The
increase in same-hospital inpatient admissions and adjusted admissions was due
primarily to an increase in services offered, physician relationship development
efforts and the addition of physicians through our focused recruitment program.
On a same-hospital basis, net outpatient revenues increased 12.4%.
Operating expenses, as a percentage of net operating revenues, increased from
81.2% for the three months ended June 30, 2000 to 81.6% for the three months
ended June 30, 2001, primarily due to an increase in provision for bad debts,
increases in utility expense and an increase in rent expense, offset by
improvements in salaries and benefits. Operating expenses include salaries and
benefits, provision for bad debts, supplies, rent and other operating expenses.
Salaries and benefits, as a percentage of net operating revenues, decreased to
38.9% from 39.0% for the comparable periods, due to the continued realization of
savings from improvements made at the hospitals acquired, offset by hospitals
acquired more recently having higher salaries and benefits as a percentage of
net operating revenues for which savings have not yet been realized. Provision
for bad debts, as a percentage of net operating revenues, increased to 9.2% for
the three months ended June 30, 2001 from 9.0% for the comparable period in 2000
due primarily to an increase in self-pay business. Supplies as a percentage of
net operating revenues remained unchanged at 11.5% for the comparable periods in
2000 and 2001. Rent and other operating expenses, as a percentage of net
operating revenues, increased from 21.7% for the three months ended June 30,
2000 to 22.0% for the three months ended June 30, 2001. EBITDA margin decreased
from 18.8% for the three months ended June 30, 2000 to 18.4% for the three
months ended June 30, 2001 due primarily to the acquisition of a previously
managed facility and the lower initial EBITDA margins associated with hospitals
acquired in 2000 and 2001.
On a same-hospital basis, operating expenses as a percentage of net operating
revenues decreased from 81.5% for the three months ended June 30, 2000 to 81.0%
for the three months ended June 30, 2001. We achieved this reduction through
efficiency and productivity gains in payroll and supplies expense reductions,
offset by a smaller increase in bad debt expense and other operating expenses.
Depreciation and amortization increased by $4.1 million from $17.5 million for
the three months ended June 30, 2000 to $21.6 million for the three months ended
June 30, 2001. The seven hospitals acquired in 2000 and one hospital acquired in
2001 accounted for $1.6 million of the increase; facility renovations and
purchases of equipment, information systems upgrades, the inclusion of a
hospital previously held for divestiture and other deferred items accounted for
the remaining $2.5 million.
Amortization of goodwill increased from $6.2 million for the three months ended
June 30, 2000 to $7.0 million for the comparable period in 2001 related to
acquired hospitals.
Interest, net decreased by $7.0 million from $32.6 million for the three months
ended June 30, 2000 to $25.6 million for the three months ended June 30, 2001.
The decrease in average long-term debt during the three months ended June 30,
2001 as compared to the three months ended June 30, 2000 accounted for $4.5
million of the decrease while a decrease in interest rates accounted for $2.5
million of the decrease. The decrease in average debt balance is the result of
debt repayments from proceeds raised from the issuance of common stock in 2000
being greater than additional sums borrowed to finance hospital acquisitions.
Income before income taxes increased from $3.4 million for the three months
ended June 30, 2000 to $19.5 million for the three months ended June 30, 2001
primarily as a result of the increases in revenue and decreases in expenses as
discussed above.
9
<Page>
Provision for income taxes increased from $3.2 million for the three months
ended June 30, 2000 to $9.9 million for the three months ended June 30, 2001 as
a result of the increase in pre-tax income.
Net income was $9.7 million for the three months ended June 30, 2001 compared to
net income of $0.2 million for the three months ended June 30, 2000.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Net operating revenues increased 27.8% to $799.6 million for the six months
ended June 30, 2001 from $625.8 million for the six months ended June 30, 2000.
Of the $173.8 million increase in net operating revenues, the seven hospitals
acquired in 2000 and one hospital acquired in 2001 contributed approximately
$104.9 million, and hospitals we owned throughout both periods contributed $68.9
million, an increase of 11.1%. The increase from hospitals owned throughout both
periods was attributable primarily to volume increases, rate increases from
managed care and other payors and an increase in government reimbursement; these
increases were offset by the 2001 period having one fewer day as compared to the
2000 period, resulting from 2000 being a leap year.
Inpatient admissions increased by 20.9%. Adjusted admissions increased by 18.7%.
Adjusted admissions is a general measure of combined inpatient and outpatient
volume. We computed adjusted admissions by multiplying admissions by gross
patient revenues and then dividing that number by gross inpatient revenues.
Average length of stay decreased by 2.6%. On a same hospital basis, inpatient
admissions increased by 6.0% and adjusted admissions increased by 4.3%. The
increase in same hospital inpatient admissions and adjusted admissions was due
primarily to an increase in services offered, physician relationship development
efforts and the addition of physicians through our focused recruitment program.
On a same hospital basis, net outpatient revenues increased 12.5%.
Operating expenses, as a percentage of net operating revenues, increased from
80.8% for the six months ended June 30, 2000, to 81.1% for the six months ended
June 30, 2001, primarily due to an increase in provision for bad debts,
increases in utility expense and an increase in rent expense, offset by
improvements in salaries and benefits. Salaries and benefits, as a percentage of
net operating revenues, decreased to 38.7% from 39.0% for the comparable
periods, due to the continued realization of savings from improvements made at
the hospitals acquired offset by hospitals acquired more recently having higher
salaries and benefits as a percentage of net operating revenues for which
savings have not yet been realized. Provision for bed debts, as a percentage of
net operating revenues, increased to 9.3% for the six months ended June 30, 2001
from 9.0% for the comparable period in 2000 due primarily to an increase in
self-pay business. Supplies as a percentage of net operating revenues remained
unchanged at 11.6% for the comparable periods in 2000 and 2001. Rent and other
operating expenses, as a percentage of net operating revenues, increased from
21.2% for the six months ended June 30, 2000 to 21.5% for the six months ended
June 30, 2001. EBITDA margins decreased from 19.2% for the six months ended June
30, 2000 to 18.9% for the six months ended June 30, 2001 due primarily to the
acquisition of a previously managed facility and the lower initial EBITDA
margins associated with hospitals acquired in 2000 and 2001.
On a same hospital basis, operating expenses as a percentage of net operating
revenues decreased from 81.2% for the six months ended June 30, 2000 to 80.6%
for the six months ended June 30, 2001. We achieved this reduction through
efficiency and productivity gains in payroll and supplies expense reductions,
offset by a smaller increase in bed debt expense and other operating expenses.
Depreciation and amortization increased by $9.2 million from $33.9 million for
the six months ended June 30, 2000 to $43.1 million for the six months ended
June 30, 2001. The seven hospitals acquired in 2000 and one hospital acquired in
2001 accounted for $2.9 million of the increase, facility renovations and
purchases of equipment, information system upgrades, the inclusion of a hospital
previously held for divestiture and other deferred items accounted for the
remaining $6.3 million.
Amortization of goodwill increased from $12.4 million for the six months ended
June 30, 2000 to $14.1 million for the comparable period in 2001 related to
acquired hospitals.
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Interest, net decreased from $65.3 million for the six months ended June 30,
2000 to $53.2 million for the six months ended June 30, 2001. The decrease in
average long-term debt during the comparable periods in 2000 and 2001 accounted
for $9.8 million of the decrease while a net decrease in interest rates
accounted for the remaining difference. The decrease in average debt balance is
the result of debt repayments from proceeds raised from the issuance of common
stock in 2000 being greater than additional sums borrowed to finance hospital
acquisitions.
Income before income taxes increased from $8.3 million for the six months ended
June 30, 2000 to $40.7 million for the six months ended June 30, 2001 primarily
as a result of the increases in revenue and decreases in expenses as discussed
above.
Provision for income taxes increased from $7.2 million for the six months ended
June 30, 2000 to $20.2 million for the six months ended June 30, 2001 as a
result of the increase in pre-tax income.
Net income was $20.5 million for the six months ended June 30, 2001 compared to
$1.1 million for the six months ended June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased $129.9 million to $95.5
million for the six months ended June 30, 2001 from a cash use of $34.4 million
for the six months ended June 30, 2000. This increase represents an increase in
net income of $19.4 million, an increase in non-cash expenses of $11.8 million,
an increase of cash from working capital of $67.8 million and the absence of the
one-time compliance settlement payment of $30.9 million made in 2000 when
comparing the six month periods ended June 30, 2000 and 2001. The increase of
cash from working capital can be attributed primarily to improvement in
collections of accounts receivable, an increase in our tax provision, which we
anticipate will be substantially offset by our existing net operating loss
carryforwards and therefore not result in cash outflow, and overall better
management of other working capital items. The use of cash from investing
activities increased from $74.3 million for the six months ended June 30, 2000
to $104.5 million for the six months ended June 30, 2001. This increase is the
result of the additional cost of the acquisition in 2001 and additional
expenditures on property, equipment and other assets. Net cash provided by
financing activities decreased $79.4 million during the comparable periods as a
result of not borrowing to meet capital expenditure and working capital needs
during the 2001 period and not borrowing for the compliance settlement as was
done in the 2000 period.
CAPITAL EXPENDITURES
We expect to incur total capital expenditures of approximately $90 million in
2001, including $60 million for renovation and equipment purchases and $30
million for construction of replacement hospitals. Under hospital purchase
agreements in effect as of June 30, 2001, we are obligated to construct four
replacement hospitals through 2005 with an aggregate estimated construction
cost, including equipment, of approximately $120 million. During the six months
ended June 30, 2001, we incurred expenditures of approximately $9.0 million
related to these replacement hospitals.
CAPITAL RESOURCES
Net working capital was $169.1 million at June 30, 2001 compared to $167.7
million at December 31, 2000. The $1.4 million increase was attributable
primarily to an increase in cash and cash equivalents, an increase in accounts
receivable consistent with the increase in net revenues and a decrease in
accrued interest and other current liabilities offset by a decrease in prepaid
expenses and an increase in current income taxes payable that we expect to
settle using net operating loss carry forwards.
In July 2001, we amended our credit agreement. Our amended credit agreement
provides for $644 million in term debt with quarterly amortization and staggered
maturities in 2001, 2002, 2003, 2004 and 2005. This agreement also provides for
revolving facility debt for working capital of $200 million and acquisitions of
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$263.2 million at June 30, 2001. This new amendment extends the maturity of
approximately 80% of the revolver commitments from approving lenders to January
2, 2004. Borrowings under the facility bear interest at either LIBOR or prime
rate plus various applicable margins which are based upon financial covenant
ratio tests. As of June 30, 2001 using amended rates, our weighted average
interest rate under our credit agreement was 7.04%. As of June 30, 2001, we had
availability to borrow an additional $162.1 million under the working capital
revolving facility and an additional $144.2 million under the acquisition loan
revolving facility.
We are required to pay a quarterly commitment fee at a rate of 0.375% to 0.500%
based on specified financial criteria. This fee applies to unused commitments
under the revolving credit facility and the acquisition loan facility.
The terms of the credit agreement include various restrictive covenants. These
covenants include restrictions on additional indebtedness, investments, asset
sales, capital expenditures, dividends, sale and leasebacks, contingent
obligations, transactions with affiliates, and fundamental changes. The
covenants also require maintenance of various ratios regarding senior
indebtedness, senior interest, and fixed charges.
We believe that internally generated cash flows and borrowings under our
revolving credit facility and acquisition facility will be sufficient to finance
acquisitions, capital expenditures and working capital requirements through the
next 12 months. If funds required for future acquisitions exceed existing
sources of capital, we will need to increase our credit facilities or obtain
additional capital by other means.
REIMBURSEMENT, LEGISLATIVE AND REGULATORY CHANGES
Legislative and regulatory action has resulted in continuing change in the
Medicare and Medicaid reimbursement programs which will continue to limit
payment increases under these programs. Within the statutory framework of the
Medicare and Medicaid programs, there are substantial areas subject to
administrative rulings, interpretations, and discretion which may further affect
payments made under those programs, and the federal and state governments might,
in the future, reduce the funds available under those programs or require more
stringent utilization and quality reviews of hospital facilities. Additionally,
there may be a continued rise in managed care programs and future restructuring
of the financing and delivery of healthcare in the United States. These events
could have an adverse effect on our future financial results.
INFLATION
The healthcare industry is labor intensive. Wages and other expenses increase
during periods of inflation and when labor shortages occur in the marketplace.
In addition, suppliers pass along rising costs to us in the form of higher
prices. We have implemented cost control measures, including our case and
resource management program, to curb increases in operating costs and expenses.
We have, to date, offset increases in operating costs by increasing
reimbursement for services and expanding services. However, we cannot predict
our ability to cover or offset future cost increases.
RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Other Intangible Assets" (the "Statements").
These Statements make significant changes to the accounting for business
combinations, goodwill and intangible assets.
SFAS No. 141 eliminates the pooling-of-interests method of accounting for
business combinations. In addition, it further clarifies the criteria for
recognition of intangible assets separately from goodwill. This statement's
provisions apply to business combinations accounted for using the purchase
method for which the date of acquisition is July 1, 2001, or later.
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SFAS No. 142 discontinues the practice of amortizing goodwill and indefinite
lived intangible assets. Its nonamortization provisions are effective January 1,
2002 for goodwill existing at June 30, 2001, and are effective immediately for
business combinations with acquisition dates after June 30, 2001. Intangible
assets with a determinable useful life will continue to be amortized over that
period. SFAS No. 142 requires the Company to complete a transitional goodwill
impairment test during the initial interim period of calendar year 2002. Any
impairment loss will be recorded as soon as possible, but in no case later than
December 31, 2002. In addition, SFAS No. 142 requires that intangible assets and
goodwill be tested at least annually for impairment of carrying value;
intangible assets would be tested for impairment more frequently if certain
indicators are encountered.
We expect to adopt SFAS No. 142 effective January 1, 2002. Early adoption and
retroactive application of SFAS No. 141 and SFAS No 142 are not permitted.
Subject to final analysis, the Company expects application of the
nonamortization provisions of the Statements to result in a positive effect on
net income of at least $23 million or $0.25 per share - diluted in calendar
year 2002. The Company will perform the first of the required impairment tests
of goodwill and indefinite lived intangible assets as of January 1, 2002. The
Company doesn't expect the effect of these Statements to have a significant
effect on its financial position.
FEDERAL INCOME TAX EXAMINATIONS
The Internal Revenue Service is examining our filed federal income tax returns
for the tax periods ended between December 31, 1993 and December 31, 1996. A
Revenue Agent's Report has been issued in connection with the examination of the
December 31, 1993, 1994, 1995 and July 10, 1996 tax periods wherein the Internal
Revenue Service has prepared several adjustments, primarily involving temporary
or timing differences. To date, a Revenue Agent's Report has not been issued in
connection with the examination of the December 31, 1996 period. While we
anticipate a resolution of the current examinations by the end of the current
calendar year, we do not expect that the ultimate outcome of the Internal
Revenue Service examinations will have a material effect on us.
FORWARD-LOOKING STATEMENTS
Some of the matters discussed in this filing include forward-looking statements.
Statements that are predictive in nature, that depend upon or refer to future
events or conditions or that include words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," "thinks," and similar expressions
are forward-looking statements. These statements involve known and unknown
risks, uncertainties, and other factors that may cause our actual results and
performance to be materially different from any future results or performance
expressed or implied by these forward-looking statements. These factors include
the following:
o general economic and business conditions, both nationally and in the
regions in which we operate;
o demographic changes;
o existing governmental regulations and changes in, or the failure to comply
with, governmental regulations or our corporate compliance agreement;
o legislative proposals for healthcare reform;
o our ability, where appropriate, to enter into managed care provider
arrangements and the terms of these arrangements;
o changes in Medicare and Medicaid payment levels;
o liability and other claims asserted against us;
o competition;
o our ability to attract and retain qualified personnel, including
physicians;
o trends toward treatment of patients in lower acuity healthcare settings;
o changes in medical or other technology;
o changes in generally accepted accounting principles;
o the availability and terms of capital to fund additional acquisitions or
replacement facilities; and
o our ability to successfully acquire and integrate additional hospitals.
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Although we believe that these statements are based upon reasonable assumptions,
we can give no assurance that our goals will be achieved. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on these forward-looking statements. These forward-looking statements are made
as of the date of this filing. We assume no obligation to update or revise them
or provide reasons why actual results may differ.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate changes, primarily as a result of our credit
agreement which bears interest based on floating rates. We have not taken any
action to cover interest rate market risk, and are not a party to any interest
rate market risk management activities.
A 1% change in interest rates on variable rate debt would have resulted in
interest expense fluctuating approximately $1.8 million for the three months
ended June 30, 2001 and $3.5 for the six months ended June 30, 2001.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the matter of U.S. EX REL. BLEDSOE V. COMMUNITY HEALTH SYSTEMS,
INC., Case # 2-00-0083, transferred from the Northern District of
Georgia and now pending in the Middle District of Tennessee, the
relator has filed a motion seeking from the United States government a
portion of the settlement proceeds from the Company's May 2000
settlement with the U.S. Department of Justice, the Office of the
Inspector General, and applicable state Medicaid programs. The
government is vigorously opposing this motion. Should the relator
prevail on this motion, any monies would come from the United States
and not the Company, and at least a portion of the relator's lawsuit
would likely be dismissed. We are still awaiting disposition of our
motion to dismiss the case.
In the matter of U.S. EX REL. SMITH V. COMMUNITY HEALTH SYSTEMS, INC.,
which was filed in the Middle District of Tennessee, the Department of
Justice notified us earlier this year that it would not intervene in
the case and the relator has subsequently dismissed the case.
In the matter of U.S. EX REL. KOWATLI V. RUSSELL COUNTY MEDICAL CENTER,
ET al. filed in Abingdon, Virginia, the Department of Justice has
notified the Court that it will not intervene in the case. We have not
yet been served with a complaint in this case. The relator has filed a
motion similar to the relator's motion in the Bledsoe case, seeking a
portion of the proceeds of the May 2000 settlement. The government is
vigorously opposing this motion and has moved to dismiss the case
against it.
In August 2001, the Company reached a civil settlement with the U.S.
Department of Justice regarding the Harris Hospital mammography
investigation. The Company paid $65,000 in connection with the
settlement, but admitted no liability in the matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the company's annual meeting of stockholders, held on May 22, 2001,
in New York, New York, the following directors were elected as Class I
directors of the Company: W. Larry Cash, Robert J. Dole, J. Anthony
Forstmann, and Harvey Klein, M.D. The terms of the Class I directors
will expire at the annual meeting of stockholders in 2004 but not
before their respective successors are elected and qualified. The terms
of the following Class II directors will continue until the annual
meeting of stockholders in 2002: Dale F. Frey, Sandra J. Horbach, and
Michael A. Miles. The terms of the following Class II directors will
continue until the annual meeting of stockholders in 2003: Sheila P.
Burke, Theodore J. Forstmann, Thomas H. Lister, and Wayne T. Smith. The
stockholders also ratified the appointment of Deloitte & Touche LLP as
the company's independent public accountants for the year ending
December 31, 2001.
In the elections described above, votes were cast as follows:
<Table>
<Caption>
ELECTION OF - VOTES FOR VOTES WITHHELD
- ------------- --------- --------------
Robert J. Dole 77,430,423 55,860
J. Anthony Forstmann 77,429,803 56,480
Harvey Klein, M.D. 77,429,553 56,730
W. Larry Cash 71,100,261 6,386,022
<Caption>
RATIFICATION OF - VOTES FOR VOTES AGAINST VOTES ABSTAINING
- ----------------- --------- ------------- ----------------
Deloitte & Touche, LLP 77,465,112 18,071 3,100
</Table>
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ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Index to Exhibits located on page 19.
(b) Reports on Form 8-K
Form 8-K, dated April 25, 2001, in connection with our press
release related to first quarter 2001 operating results.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 2001 COMMUNITY HEALTH SYSTEMS, INC.
(Registrant)
By: /s/ Wayne T. Smith
-------------------------------------
Wayne T. Smith
Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
By: /s/ W. Larry Cash
-------------------------------------
W. Larry Cash
Executive Vice President and Chief
Financial Officer
(principal financial officer)
By: /S/ T. Mark Buford
-------------------------------------
T. Mark Buford
Vice President and Corporate Controller
(principal accounting officer)
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INDEX TO EXHIBITS
NO. DESCRIPTION
- --- -----------
(10) Material contracts
Included herein as Exhibit 10.1 (Second and Third Amendment to the
Amended and Restated Credit Agreement)
18